"Today, the first and perhaps the only duty of the philosopher is to defend man against himself: to defend man against that extraordinary temptation toward inhumanity to which - almost without being aware of it - so many human beings today have yielded."
Gabriel Marcel

10 June 2015

Fragility: What Has the Watchers Worried In the US Debt Markets

As you know I am on the lookout for a 'trigger event' that might spark another financial crisis, given the composition of the economy and the financial markets.

In the last financial crisis 2008, it was the failure of the two Bear Stearns hedge funds that exposed the grossly mispriced risks in mortgage backed financial assets, and the generally flawed nature of the market's collateralized debt obligations. This led to a cascade of failures in fraudulently priced assets, and resulted in increasingly large institutional failures, including the collapse of Lehman Brothers.

One can draw some parallels with the financial crisis before that, which was the gross mispricing of risk and inflated values of internet-related tech companies that had grown to obviously epic proportions by 2000. A failure of several key tech bellwethers to make their numbers, and some negative results in the economy, showed the flaws in the underlying assumptions in what was clearly an asset bubble. And once the selling started, it was Katy-bar-the-door.

The failure of two relatively minor hedge funds was not a great event. The failure of a tech bellwether to make its quarterly numbers is not either. But their interconnectedness to the other portions of the world markets through the financial institutions on Wall Street, and more importantly, the fragile nature of the entire pyramid scheme of fraudulently constructed and mispriced risk of financial assets, caused an inherently shaky system to fall apart. What was most shocking was how quickly it happened once the dominos started falling.

The debt market in the US, with its deep ties to private equities, is probably not a trigger event, the fuse itself. But it well might serve as the powder keg that will transmit the effects of some more individual event throughout the world's markets and economies.

The gross mispricing of risks in financial paper, again, and the lack of reform in the financial system along with excessive leverage and mispricing of risk, the fragility of long distorted markets if you will, has certainly risen to impressive levels again.

It is a familiar template of recklessness, fraud, and then reckoning. Afterward there is the usual attempt to blame the government officials which have been corrupted, and the people who have been duped and swindled. Quite often some scapegoat will be found to be demonized.

I am thinking that this time the problem will arise overseas, with the failure of some major financial institutions there. Perhaps Greece will provide the spark. Or the Ukraine, or Mideast, or something yet unforeseen. The failure of some major European bank certainly has historical precedent.

And if we do experience another crisis, do not be surprised if the moguls of finance come to the Congress through their proxies again, with a sheet of paper in hand demanding hundreds of billions of dollars, or else.

Last time it was a bail-out, which was the printing of money by the Fed to monetize the banking losses and shift them to the public. This time they are thinking of something more direct, talking about a bail-in. What if they eliminated cash, and started utilizing and redploying financial assets like savings and pensions. The uber-wealthy already have their wealth parked in hard income-producing assets and offshore tax havens. Who would stop them?

Like war, there will be an end to this kleptocratic economy of bubble economics and financial crises when the costs are borne by those responsible for it, and who so far are benefitting from it, enormously.

Tell us why you think it might be different this time. What has really changed? From what I can tell, it has not only stayed the same for the most part under the cosmetics of change, and significant portions of the financial landscape have gotten decidedly more dangerous, larger, and more leveraged.

Wall Street On Parade

Here Is What’s Fraying Nerves Among the Financial Stability Folks at Treasury

By Pam Martens and Russ Martens

June 10, 2015

On Monday, Richard Berner worried aloud at the Brookings Institution about what’s troubling the smartest guys in the room about today’s markets.

Berner is the Director of the Office of Financial Research (OFR) at the Treasury Department. That’s the agency created under the Dodd-Frank financial reform legislation to, according to their web site, “shine a light in the dark corners of the financial system to see where risks are going, assess how much of a threat they might pose,” and, ideally, provide the analysis to the folks sitting on the Financial Stability Oversight Council in time to prevent another 2008-style financial collapse on Wall Street.

Two notable concerns stood out in Berner’s talk. First was a concern about liquidity in bond markets evaporating rapidly for reasons they don’t yet “sufficiently understand.”

...Another major concern are the bond mutual funds and ETFs that have mushroomed since the 2008 crisis and are stuffed full of illiquid assets or assets which might become illiquid in a financial panic.

Le Propriétaire

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Need Little - Want Less - Love More

The Banks must be restrained, and the financial system reformed, with balance restored to the economy, before there can be any sustainable recovery.

"In the Incarnation the whole human race recovers the dignity of the image of God. Thereafter, any attack even on the least of men is an attack on Christ, who took on the form of man, and in his own Person restored the image of God in all. Through our relationship with the Incarnation, we recover our true humanity, and at the same time are delivered from that perverse individualism which is the consequence of sin, and recover our solidarity with all mankind." Dietrich Bonhoeffer

"A credibility trap is when the managerial functions of a society have been sufficiently compromised by corruption so that the leadership cannot reform, or even honestly address, the problems of that system without implicating a broad swath of the powerful, including themselves.

The moneyed interests and their aspirants tolerate the corruption because they have profited from it, and would like to continue to do so. Discipline is maintained by various forms of soft financial rewards and career and social coercion."

These are personal observations about the economy and the markets. In providing information, I hope this allows you to make your own decisions in an informed manner, even if it is from learning by my mistakes, which are many. As a standing policy I never provide individual investment advice to anyone. I will only occasionally disclose my personal positions for purposes of illustration. Understand that my own circumstances could differ greatly from your own, and therefore what is suitable for me may not be suitable for you. My comments are intended to be reflection on general macro financial and economic events and trends.